Newcrest: Result 2015
Recommendation
After years of lousy performance, Newcrest appeared to launch a stunning turnaround in 2015, with a full-year net profit of $546m compared to a loss of over $2bn in 2014's writedown-riddled result.
The secret sauce was the currency. US Dollar gold prices may continue to fall but, for miners with Australian assets, it's the gold price in local currency that determines revenue. In Australian dollar terms, higher gold prices contributed $160m in additional profit.
The miner was also aided by lower costs. In aggregate, Newcrest reported 'all-in sustaining costs' (AISC) – which include interest, royalties and capital expenditure – of US$789 an ounce, making it the lowest-cost large miner in the world.
Key Points
Strong results
Generated by one great asset
Too many poor mines in portfolio
That may sound impressive but, drill deeper into the result, and it's clear that most of that gain came from a single asset: the marvellous Cadia mine.
Down to one
Cadia produced 670,000 ounces of gold at a cost of less than $250 an ounce, earning operating profit of over $650m by itself. Alone, Cadia was responsible for about a quarter of output, a third of revenue but two-thirds of profit. Makes you wonder why they need the other mines at all, doesn't it?
Particularly when those other mines have performed only acceptably. Profit from Telfer rose 23% as it took advantage of high Australian dollar gold prices. The currency helped so much that Newcrest reversed previous writedowns at the mine by over $500m.
Year to June | 2015 | 2014 | /(–) (%) |
---|---|---|---|
Production (m oz) | 2.4 | 2.4 | 1 |
Revenue | 4,344 | 4,040 | 8 |
Underlying profit | 515 | 432 | 19 |
Op cash flow | 1,589 | 1,037 | 53 |
Net debt | 3,761 | 3,935 | -4 |
There was no such luck at Newcrest's Papua New Guinean assets, Lihir and Hidden Valley. Hidden Valley (again) lost money and the asset's value has been slashed from $325m to just $90m. Newcrest has, effectively, admitted defeat here.
They should do likewise with Lihir. Having paid $9.5bn for the mine back in 2010, it currently has an asset value of over $7.5bn but generates no profit. The nature of the deposit demands an enormous expansion to create more scale. Without that investment, the asset is likely to languish in losses.
Lihir sucks in cash and spits out little, polluting results from the company's better performing assets. We expect savage writedowns in future years or, at best, a cheap disposal of the asset.
Shrink please
Although the market cheered this result and the headline numbers look good, they were aided by currency and dominated by the fine performance of Cadia. As we noted in Newcrest: the good and the bad (Hold – $10.64), there is an excellent miner within Newcrest but it is hidden amongst some poor mines that we would prefer were closed or sold.
Newcrest has been more open to these ideas and has been flirting with asset sales but, until it does, we can't recommend buying it. For now, HOLD.